Indiana Law Journal Indiana Law Journal

Volume 67 Issue 2 Article 2

Winter 1992

The Lifeline Banking Controversy: Putting Deregulation to Work The Lifeline Banking Controversy: Putting Deregulation to Work

for the Low-Income Consumer for the Low-Income Consumer

Edward L. Rubin University of California, Berkeley School of Law

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Recommended Citation Recommended Citation Rubin, Edward L. (1992) "The Lifeline Banking Controversy: Putting Deregulation to Work for the Low-Income Consumer," Indiana Law Journal: Vol. 67 : Iss. 2 , Article 2. Available at: https://www.repository.law.indiana.edu/ilj/vol67/iss2/2

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The Lifeline Banking Controversy:Putting Deregulation to Work

for the Low-Income Consumert

EDWARD L. RUBIN*

INTRODUCTION

Lifeline banking is a proposal to provide payment services' to low-incomepeople at a cost below the prevailing market rate. It is motivated by theview that services such as check cashing and third-party payment are anecessity of modem life, that "the poor pay more' 2 for these services, andthat they expend a disproportionate amount of their resources on them.Several states have already enacted lifeline banking statutes of various kinds.'The issue has also been before Congress on a regular basis, and while noneof the proposed bills has been enacted, there is clearly strong and continuedsupport for some form of lifeline banking.4

This Article begins from the premise that the motivations for the lifelineproposal are valid social policy: Resources should be redistributed to low-income people, and any basic service that is more expensive for them hasan undesirable, counter-redistributive effect. But the efficiency of a paymentsystem is an important goal as well. Efficiency considerations not onlyconstrain the extent to which the system can be used for redistributivepurposes, but also determine the effectiveness of redistributive strategieslike lifeline banking.

Part I of this Article describes the lifeline proposals, the controversy thathas surrounded them, and the empirical data that the debate has generated.Part II analyzes these proposals in economic terms and concludes thatthey would waste resources and provide few advantages for the intended

1 © Copyright 1992 by Edward L. Rubin.

* Professor and Associate Dean, University of California, Berkeley School of Law. J.D.Yale University, 1979. I want to thank my colleague and friend, Robert Cooter, for his helpwith this Article.

1. The payment system refers to the mechanisms used to transfer money from one personto another. At present, the principal mechanisms are cash, checks, credit cards, traveler'schecks, letters of credit, and electronic fund transfers. See E. RutaN & R. CooTER, THEPAYmENT SYsTm: CAsEs, MTm.rAms AND Issuas (1989); J. VmwAom & V. Smm, CHEcKs,PAYmENTs, AND ELEcTONic BANKING 6-22 (1986). The discussion in this Article refers primarilyto checking accounts.

2. The phrase comes from one of the seminal works in the consumer movement, D.CAxz.ovnrz, THE PooR PAY MoRE (1967).

3. See infra note 18.4. See infra notes 18-20 and 26-28 (citing legislation).

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beneficiaries. Part III advances an alternative proposal: that the financialservices industry be deregulated to allow retail chains such as supermarketsto offer federally insured deposit accounts and provide payment services.To subsidize such accounts, this Article recommends further deregulationto allow these institutions to use the funds received from eligible accountsfor internal corporate purposes without the restrictions that usually accom-pany the investment of insured deposits. Part IV describes the changes inthe law that would be required to implement these proposals.

I. THE LIFELINE BANKING CONTROVERSY

A. The Evolution of the Lifeline Concept

A lifeline is a rope thrown to someone who is drowning. As might beexpected in our technological age, the first "lifelines" that were proposedas publicly supported programs consisted not of rope, but of electrons andpetroleum-telephone and heating services for people who could not paythe existing utility rates, but who clearly needed at least a minimum levelof these services.5

The term was applied to banking services after the partial deregulationof the industry in 1980.6 Before 1970, only commercial banks were allowedto offer checking accounts, and these banks were forbidden to pay intereston the account balance. The prohibition was enacted in the midst of theGreat Depression 7 apparently in an effort to save banks from the temptationto engage in ruinous competition for deposit funds.8 The result of thisprohibition, as any economist would predict, was that banks engaged ininefficient competition. Foreclosed from offering consumers interest, theycompeted for deposit funds by building excessive numbers of branch banks,equipping these banks with marble floors and Ionic columns, providing free

5. Canner & Maland, Basic Banking, 73 Fed. Reserve Bull. 255, 256 (1987); see M.Fernstrom, Consumerism: Implications and Opportunities for Financial Services 17 (AmericanExpress Co., undated) (copy on file with the Indiana Law Journal).

6. See infra notes 14-15.7. Banking Act of 1933, ch. 89, 48 Stat. 162 (1933) (codified as heavily amended at 12

U.S.C. § 371a (1988)).8. Banking Act of 1935: Hearings on S. 1715 Before the Subcomm. on Monetary Policy,

Banking, and Deposit Insurance of the Senate Banking and Currency Comm., 74th Cong., 1stSess. 491 (1935) (remarks of Sen. McAdoo); Consumer Checking Account Equity Act of 1979:Hearings Before the Subcomm. on Financial Institutions Supervision, Regulation and Insuranceof the House Comm. on Banking, Finance and Urban Affairs, 96th Cong., 1st Sess. 55-56(1979) (statement of John G. Heimann, Comptroller of the Currency) [hereinafter 1979 HouseHearings]; S. AXILROD, THE IMPACT OF THE PAYMENT OF INTEREST ON DEAND DEPosITs 6-15(Board of Governors of the Federal Reserve System 1977). Congress may also have believedthat the willingness of money center banks to pay interest on interbank deposits was drainingloanable funds out of rural banks. Id. at 11; Winer, Comment, The Legality of AutomaticFund Transfer Plans, 47 U. Cm. L. REv. 137 (1979).

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services, and offering inducements-such as the proverbial toaster-foropening new accounts. 9

Through some clever private initiatives, cautious congressional action,and disingenuous agency regulations, the interest prohibition was graduallyeroded during the 1970s.10 It was finally abolished by the DepositoryInstitutions Deregulation and Monetary Control Act of 1980," the center-piece of the Carter administration's deregulatory efforts in the financialservices area. Once banks were permitted to pay market rates of intereston checking account balances, the end of free toasters and Ionic columnswas at hand. More significantly, banks began to price their payment servicesexplicitly.' 2 This was certainly a more efficient approach, but it worked tothe disadvantage of low-income customers. Since these customers tended tohave small account balances, they received little interest but were requiredto pay increased charges for maintaining the account, stopping payment onchecks, writing insufficient funds checks, and, in some cases, accessing theiraccounts through automated teller machines (ATM). 3

This situation soon attracted the attention of consumer advocates. Theywere not hostile to deregulation generally-it was consumers, after all, whowere receiving the newly authorized interest payments on their checkingaccount balances-but they began to believe that low-income consumershad lost more than they had gained.' 4

9. See NOW Accounts, Federal Reserve Membership and Related Issues: Hearings Beforethe Subcomm. on Financial Institutions of the Senate Comm. on Banking, Housing and UrbanAffairs, 95th Cong., Ist Sess. 316-18 (1977) (statement of Ronald Haselton, President,Consumers Savings Bank, Worchester, Mass.); id. at 633-34 (statement of Mark Silbergeld,Director, Washington D.C. Office, Consumers Union); S. AxURoD, supra note 8, at 19-21.

10. For a summary of these events, see 1979 House Hearings, supra note 8, at 57-61(statement of John G. Heimann, Comptroller of the Currency); E. RUnN. & R. COOTER, supranote 1, at 101-07. The principal instrument which triggered these events was the NegotiableOrder of Withdrawal (NOW) account. See generally Leary, Is the UCC Prepared for theThrifts' NOWs, NINOWs and Share Drafts?, 30 CAm. U.L. Rav. 159 (1981); Riordan,Negotiable Instruments of Withdrawal, 30 Bus. LAW. 151 (1974); Wilson, The "New Checks":Thrift Institution Check-Like Instruments and the Uniform Commercial Code, 45 Mo. L. Rav.199 (1980).

11. Pub. L. No. 96-221, 94 Stat. 132 (1980) (codified as amended at 12 U.S.C. §§ 3501-3524 (1988)). The specific section was § 302(a), 94 Stat. at 145-46 (amending 12 U.S.C. §371a). See generally T. CARGILL & G. GARCIA, FnNciA DEREGULATION AND MONETARYCONTROL (1982); K. COOPER & D. FRASER, BANxKING DEREGULATION AND THE NEW COMPETITONIN FINANCIAL SERvIcEs 105-25 (1984).

12. See Government Check Cashing, "Lifeline" Checking and the Community ReinvestmentAct: Hearings Before the Subcomm. on Consumer and Regulatory Affairs of the SenateComm. on Banking, Housing and Urban Affairs, 101st Cong., Ist Sess. 137-38 (1989) (statementof Peggy Miller, Legislative Representative, Consumer Federation of America) [hereinafter1989 Senate Hearings]; Canner & Maland, supra note 5, at 255.

13. See infra note 15.14. See, e.g., Brobeck, Economic Deregulation and the Least Affluent: Consumer Protec-

tion Strategies, 47 J. Soc. IssUEs 169, 171-77 (1991); Gross, Deregulation: Boon for theAffluent, Am. Banker, July 2, 1984, at 1; Kutler, The Lifeline Issue: Can the Consumerists

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Concern soon shifted to the payment services available to low-incomeconsumers generally.'5 Many low-income consumers were not hurt by de-regulation because they did not have checking accounts either before orafter 1980. That was hardly an advantage, however. Anyone who was paidby check, whether from a job or a public welfare agency, needed to cashthat check, and most people also needed to make some noncash paymentsto third parties. For those who did not possess checking accounts, the mostcommon way to obtain payment services was believed to be check-cashingstores or currency exchanges. 16 These seemed to charge higher rates thanthe deregulated banks, thus presenting an even more serious social policyproblem.

Consumer advocates proposed the lifeline account as the solution to thehigh cost of bank and nonbank payment services. Banks would be compelledby statute to offer low-income consumers an account through which theycould carry out a limited number of transactions at below-market rates.'7

By 1984, legislative proposals were being advanced throughout the nationto implement the lifeline banking concept. At least four states actuallyenacted statutes, although all were of fairly limited scope.' s A number of

Stop the Deregulators?, Am. Banker, Mar. 13, 1985, at 4; Nader, Deregulation Has Potentialfor Consumer Confusion, Abuse, Am. Banker, July 12, 1983, at 6; Public Advocates, Inc.,Petty Larceny: Excessive Bank Charges Produce Crisis for the Poor (Aug. 7, 1984) (unpublishedadministrative petition on file with the Indiana Law Journal) [hereinafter Petty Larceny].

15. See Comprehensive Reform in the Financial Services Industry: Hearings Before theSenate Comm. on Banking, Housing and Urban Affairs, 99th Cong., 1st Sess. 44-156 (1985)(statement of Stephen Brobeck, Executive Director, Consumer Federation of America) [here-inafter 1985 Senate Hearings].

16. Riemer, Liberty, Justice and Bank Accounts for All?, Bus. WK., July 1, 1985, at 68;Petty Larceny, supra note 14, at 33-35.

17. A coalition of consumer groups in California, for example, proposed that people withyearly incomes of $11,000 or less (in 1984) be offered accounts with no monthly service chargefor the first ten checks and insufficient funds charges of no more than $5 per item. It alsoproposed that banks cash government checks for free, regardless of whether the payee had anaccount at the bank, and that the cost of money orders be regulated by law. Petty Larceny,supra note 14, at 38-39; Riemer, supra note 16, at 39. The members of the coalition wereConsumer Action, Self-Help for the Elderly, Black Women Organized for Political Action,Gray Panthers, Oakland Citizens Committee for Urban Renewal, League of United LatinAmerican Citizens, Sacramento Urban League, Progressive Senior Citizens, and the NationalOrganization for Women (San Francisco Chapter).

18. Massachusetts requires its state-chartered banks to provide savings and checking ac-counts without service charges to customers over 65 or under 18. MAss. ANN. LAWS ch. 167D,§ 2 (Law. Co-op. 1987). Illinois requires banks to offer accounts with 10 free checks and amaximum initial deposit of $100 for customers over 65. IL. ANN. STAT. ch. 17, § 504 (Smith-Hurd 1981 & Supp. 1991). Minnesota and Pennsylvania require lifeline banking services asquid pro quo for permission to engage in interstate banking. Minnesota specifies that customerswith annual family incomes below the federal poverty income guidelines or who receive publicassistance must be offered an account with no initial or periodic fees, six free checks, and sixfree ATM transactions per month. Reciprocal Interstate Banking Act, MiNN. STAT. ANN. §§46.044, 48.512 (West 1988). Pennsylvania leaves the details to the state banking department.Act of June 25, 1986, 1986 Pa. Laws 259 (codified at PA. STAT. ANN. tit. 7, § 116(i)-(k)

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other states considered lifeline statutes but did not enact them.' 9 In addition,various bills with lifeline features were introduced in Congress. 20 Even theFederal Reserve joined the effort, issuing a joint policy statement with otherregulators that encouraged banks to provide "basic banking services" atlower rates.2 1

The furor over lifeline banking dampened somewhat in the latter half ofthe 1980s. Consumer advocates in the financial services area directed theirenergies largely toward the issue of funds availability, where they achievednotable success with the passage of the Expedited Funds Availability Actof 1987.2 Whether from fear of the Federal Reserve, from a desire toforestall the demand for lifeline legislation, or from a sense of businessopportunities, banks began to offer low-cost checking accounts. 23 Theseaccounts-which banks preferred to call "basic" rather than "lifeline" 24-were often designed along the lines of the legislation that had been enactedin other jurisdictions. 25

Although lifeline banking no longer possesses the shock effect that it didwhen first proposed, it remains a major public policy issue in the financialservices area. Senator Howard Metzenbaum has introduced a series of lifelinebills over the last few years, and they have received serious consideration

(Purdon 1967 & Supp. 1991)). Massachusetts and Connecticut have enacted laws requiringbanks to cash government checks for nondepositors. 1987 Conn. Acts 24, (Reg. Sess.) (codifiedat CoNN. GEN. STAT. ANN. §§ 36-9bb to -9cc (West 1987 & Supp. 1991)).

19. See, e.g., Sudo, Connecticut Banks Mull Voluntary Low-Cost Lifeline Checking Ac-counts, Am. Banker, Dec. 11, 1985, at 2, 23.

20. H.R. 2661, 99th Cong., 1st Sess., 131 CONG. Rc. 14,058 (1985); H.R. 2011, 99thCong., 1st Sess. 131 CONG. REc. 7611 (1985). The 1985 House bill, for example, was acomprehensive consumer banking bill introduced by Representative Charles Schumer. Title II,"Consumer Access to Depository Institutions," required every federally insured depositoryinstitution to offer a basic account with no minimum balance, no fee for the first eight checksand the first five other withdrawals each month, and specified limits on other charges. H.R.2661, supra.

21. See 47 Wash. Fin. Rep. (BNA) 403-04 (Sept. 15, 1986); Canner & Maland, supra note5, at 266; Easton, Fed Moves to Encourage Banks to Provide Low-Cost Services, Am. Banker,Sept. 11, 1986, at 1.

22. Pub. L. No. 100-86, 101 Stat. 552 (codified at 12 U.S.C. §§ 4001-4010 (West 1988)).For a general discussion of this legislation, see R. BRAu, Tn EXPEDITED FuNms AvALABrrYMAuAL (1989); C6oter & Rubin, Orders and Incentives as Regulatory Methods: The ExpeditedFunds Availability Act of 1987, 35 UCLA L. Rnv. 1115, 1140-50 (1988).

23. See Brenner, New York Scores Itself High on "Basics," Am. Banker, Mar. 2, 1989,at 6; Canner & Maland, supra note 5, at 265-66; Sudo, supra note 19; Weinstein, MaineBanks OfferAnnual-Fee Checking, Am. Banker, Dec. 17, 1987, at 1; A. Fox & K. McEldowney,Bank Fees on Consumer Accounts: The Fourth Annual National Survey 3-4 (ConsumerFederation of America, undated) (unpublished survey; copy on file with the Indiana LawJournal); K. Peyton, Banking for the Masses: Are Basic Bank Accounts the Answer? (1988)(unpublished masters thesis; copy on file with the Indiana Law Journal).

24. See Canner & Maland, supra note 5, at 256.25. See supra note 18.

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in both houses of Congress. 26 The current version consists of two separatebills. One requires a bank to cash government checks of $1500 or less atcost even when the payee does not have an account at that bank.27 Thesecond requires the bank to offer checking services at cost to people whohave account balances under $1000. 28 Neither has been enacted, but theidea behind them remains very much alive.

B. The Empirical Basis of the Lifeline Proposal

The consumer advocates and bank representatives who lined up onopposite sides of the lifeline services debate possessed not only differentpersonal affiliations and material interests, but also different images of theworld. Consumer advocates believed that banks were driving away indigent,and even middle-class, customers and were directing their energies to themost affluent segments of the population.29 The consumer advocates alsoheld the not entirely consistent belief that banks were making excessiveprofits at the expense of ordinary consumers by charging high fees ontransaction accounts. 0 The banks saw themselves as beleaguered by demandsto subsidize indigent consumers at the expense of their other customers,

26. See, e.g., H.R. 3181, 101st Cong., 1st Sess. (1989); H.R. 3180, 101st Cong., 1st Sess.(1989); S. 907, 101st Cong., 1st Sess. (1989); S. 906, 101st Cong., 1st Sess. (1989); H.R. 5094,100th Cong., 2nd Sess. (1988). Senator Metzenbaum has also introduced, or attempted tointroduce, lifeline banking provisions as amendments to comprehensive financial reform billson a number of occasions. 52 Banking Rep. (BNA) 1060-61 (May 8, 1989).

27. Government Check Cashing Act of 1991, S. 414, 102d Cong., 1st Sess. (1991). Thebill would allow banks to require nondepositors who want to cash checks to register andobtain some form of identification document. While this may seem like a reasonable precautionagainst fraud, the registration provisions are fairly complex and may act as a disincentive tolow-income customers.

28. Basic Banking Services Act of 1991, S. 415, 102d Cong., 1st Sess. (1991). Additionalrequirements are that the opening balance be no less than $25 and that the minimum balancebe no less than $I.

29. See 1989 Senate Hearings, supra note 12, at 132 (statement of Robert J. Sell, Member,National Legislative Council, American Association of Retired Persons); Consumer Access toBasic Financial Services, Hearing Before the Subcomm. on Consumer Affairs & Coinage ofthe House Comm. on Banking, Finance & Urban Affairs, 101st Cong., 1st Sess. 32 (1989)(statement of Mary Ann Cunningham, Chairperson, Banking Committee, Association ofCommunity Organizations for Reform Now) [hereinafter 1989 House Hearings]; id. at 34(statement of Jean Ann Fox, President, Virginia Citizens Consumer Council); Gross, supranote 14; Petty Larceny, supra note 14, at 24-35.

30. See 1989 Senate Hearings, supra note 12, at 44 (statement of Rosemary Dunlap,Virginia Citizens Consumer Council); id. at 137 (statement of Peggy Miller, LegislativeRepresentative, Consumer Federation of America, Washington, D.C.); Brobeck, supra note14, at 174-76; Petty Larceny, supra note 14, at 10-28. The two claims can be reconciled byconcluding that some poor and middle-class customers are leaving the banking system, whilethose who remain are being victimized by excessively high charges. How this would occur ina competitive environment is discussed below.

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their shareholders, their borrowers, and the free enterprise system." Theyalso believed that anyone who wanted a checking account could readilyobtain one at affordable rates . 2

While some of these beliefs were purely interpretive, others were basedon empirically verifiable factual assertions. During the course of the lifelinedebate, a rather respectable level of empirical research was carried out; itwas not determinative, but it was quite creditable. The basic demographicfacts that underlie the call for lifeline banking can be found in the extensivesurveys of consumer financial services conducted by the Federal ReserveBoard 'in 1977 and 1983.11 According to the surveys, 66% of the familiesin the lowest income decile did not possess a checking account. For thenext lowest decile, the figure was 42%; for the two middle deciles, it was20% and 13%; and for the two highest deciles, it was 5% and 30o.Moreover, families headed by nonwhites were disproportionately representedamong those without checking accounts, and families headed by nonwhitewomen were even more disproportionately represented. Families headed bynonwhites constituted about 30% of all families with incomes under $10,000,but nearly 57% of such families had neither a savings nor a checkingaccount. Families headed by nonwhite women comprised 17% of all familieswith incomes under $10,000 but 340o of those without accounts. Amongall families, those headed by nonwhites totalled 19% and those headed bynonwhite women totalled 7%, but 500o of the families that did not haveany deposit account were headed by nonwhites and 27% were headed bynonwhite women.14

Reacting to statistics such as these, the American Bankers Association(ABA) commissioned a survey by the Unidex Corporation to determine thereasons why people do not possess checking accounts." The survey consistedof 527 telephone interviews with families who had no checking account and

31. See 1989 Senate Hearings, supra note 12, at 125 (statement of John Kelly, Jr., President,National Bankers Association); id. at 94-97 (statement of Robert Stevens, President, BrynMawr Trust Co.); 1989 House Hearings, supra note 29, at 59 (statement of Robert Stevens,President, Bryn Mawr Trust Co.); Kutler, supra note 14.

32. See 1989 Senate Hearings, supra note 12, at 106 (statement of Richard Loundy,Chairman of the Board, Devon Bank, Chicago, Ill.); id. at 95-96 (statement of Robert Stevens,President, Bryn Mawr Trust Co.); 1989 House Hearings, supra note 29, at 60-62 (statementof Victor Bennett, Chairman, Bank Operations Committee, Independent Bankers Associationof America); AMERICAN BANKERS AssOCIAToN, ANAYSIS OF UNmEX SURVEY OF Low INCOMEHOUSEHOLDS WrmoTrr CHECKING AccouNTs (Mar. 7, 1985) [hereinafter AMERICAN BANKERSASSOCIATON] (copy on file with the Indiana Law Journal), reprinted in part in E. RUBIN &R. COOTER, supra note 1, at 148-50.

33. T. DURKIN & G. ELLEHAUSEN, 1977 CONSUMER CREDrr SURVEY (Board of Governorsof the Federal Reserve System, 1977); Avery, Elliehausen & Canner, Survey of ConsumerFinances 1983, 70 Fed. Reserve Bull. 679 (1984).

34. These conclusions are conveniently summarized in Canner & Maland, supra note 5, at261-62.

35. AMERICAN BANKERS ASSOCIATION, supra note 32.

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whose income was below $20,000. In response to a question about whythey had chosen not to have a checking account, 21.6% of the respondentssaid they did not need it, 28.7% said they did not want it, and 43.8% saidthey could not afford it. When the last group was probed, 86.8% said theydid not have enough money to make the account worthwhile, while only10.8% repeated that they could not afford it. Only 2.4% specified that theycould not afford the service charges. 3 6 From this, the ABA concluded thatonly 3% of the respondents had decided to close or forgo a checkingaccount because of service charges. 37

A few months after the ABA/Unidex survey, Consumer Action conductedits own survey, interviewing 615 people at unemployment offices, check-cashing outlets, senior housing facilities, social service agencies, and collegecampuses.3" Of the 64% who did not have a checking account, 53% saidthe reason was that the account was too costly, 15% said the banks wereinconvenient, and 10% said they distrusted banks. Fully 69% of thoseinterviewed said that they would be interested in a lifeline-type account-no minimum balance, a $25 initial deposit, and a maximum fee of $1 permonth for up to 12 checks.3 9

Clearly, these studies point toward different explanations for the acknowl-edged fact that disproportionate numbers of low-income people do not havechecking accounts. Neither of these studies, however, inspires much confi-dence. Asking a few hundred consumers in face-to-face or telephone inter-views to give a succinct explanation for complex behavior is a fairly primitiveresearch technique, particularly when both sets of interviewers were wellaware of the kinds of answers they desired. Unfortunately, more sophisti-cated, neutral studies were never carried out, so the existing information,while certainly better than nothing, cannot be regarded as definitive. 40

Another way to assess the behavior of low-income customers is toinvestigate the payment systems that they use in place of checks. The mostcommon one, as the Federal Reserve study indicates, is cash. 4' Whether the

36. Id. at 1-2. Those who had once had, but closed, a checking account gave a similar setof reasons.

37. See id. at 1. In addition, the ABA pointed out that 89.8% of the respondents saidthey rarely had difficulty cashing checks. Id. at 2.

38. CONSUMER ACTION, CONSUMER BANKING SERVICE (1985) (copy on file at the IndianaLaw Journal), reprinted in part in E. RUBIN & R. COOTER, supra note 1, at 150-51.

39. Id.40. The Federal Reserve commissioned a follow-up study by the Survey Research Center

in 1986. Only 67 families without accounts were interviewed. The Center, even though it islocated at the University of Michigan, used similarly unsophisticated techniques. The datafrom this study tended to support the Unidex survey; 63% of the families reported that theydid not have a bank account because they would not use it enough to make the accountworthwhile, while none cited high service charges as the reason. Canner & Maland, supra note5, at 263-64.

41. See Avery, Elliehausen, Kennickell & Spindt, The Use of Cash and Transaction Accountsby American Families, 72 Fed. Reserve Bull. 87, 89-100 (1986).

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use of cash entails greater costs for the consumer than a checking accountis a complex, subtle question.42 There are many low-income consumers,however, who cannot rely entirely on cash because they receive part or allof their income in the form of checks: paychecks, welfare checks, socialsecurity checks, and others. Lacking a transaction account, they need tocash these checks. This leads to a subsidiary set of empirical questions:Where do these consumers cash their checks, and how much do they payfor this service?

There seem to be two major types of institutions that will cash checks:banks and check-cashing outlets or currency exchanges. Whether banksordinarily cash checks for people without accounts at the bank is a matterof debate. The Unidex survey reported that 48.8% of its interviewees, noneof whom had checking accounts, cashed their checks at a bank, savingsand loan, or credit union. Moreover, 65.6% of those surveyed said theydid not have to pay a fee in order to cash checks. 43 A survey of bank feesconducted by San Francisco Consumer Action and the Consumer Federationof America reported that only 29% of the financial institutions surveyedwould cash a government check-the least risky kind-for a nondepositorat any price. Of those that would, less than half would do so free of charge;the others charged a fee averaging $3.74 on a $300 check, or somewhatabove 1%." In 1988, the- General Accounting Office (GAO) published anextensive nationwide survey of banking institutions. It found that, as of1985, 86% of banks and 55% of thrift institutions cashed United StatesTreasury checks for nondepositors. Of these, 56% of the banks and 84%of the thrifts did so for free. The median fee at the other institutions wasabout $2. 41

These disparities in the data are not encouraging, although they may bepartially explained by disparities in the sample or the types of checksinvolved. The Consumer Federation study, for example, focused on urbanneighborhoods, and the GAO agreed that people in such neighborhoodsexperience greater difficulty cashing checks than the population at large. 46

42. A consumer who is paid in cash and pays all his obligations in cash would never needto use another payment instrument. While he would incur no direct charges for his paymentactivities, he might be subject to a variety of indirect but real expenses. Making payments incash might require hand delivery, which takes time and incurs transportation costs. Carryingand keeping cash creates a greater risk of theft, loss, and damage than using checks. Themagnitude of these indirect costs will vary from one consumer to another, and they areextremely difficult to quantify.

43. AMERICAN BANKEaS ASSOCIATION, supra note 32.44. A. Fox & K. McEldowney, supra note 23, at 5-6.45. UNITED STATES GENERAL ACCOUNTING OFICE, GOVERNMENT CHECK-CASHING ISSUES 13

(1988). reprinted in 1989 Senate Hearings, supra note 12, at 383.46. Id. at 14. Another possibility is that the banks' willingness to cash checks for

nondepositors is highly discretionary. A bank that is prepared to cash a government check fornondepositors as a matter of general policy may not do so if the nondepositor is wearing a 2

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Consumer Federation of America conducted a study of the fees chargedby currency exchanges. For cashing a Social Security check, an Aid toFamilies with Dependent Children check, or a payroll check issued by amajor national corporation, the median charge in 1987 was 1.5% of theface amount and the mean was about 1.7%. 47 The lowest charges, 0.77%to 0.78% of the face value, occurred in the State of New York, where thefees are regulated by state law; the highest were 5% .48 Half the currencyexchanges used the same fee scale for cashing personal checks; the otherhalf charged more. The mean for all institutions was 4.5% . 49 The studywas updated in 1989, and the results were generally consistent with theprior study, except for a sharp increase in the percentage charges for cashingpersonal checks. 50

Another set of studies by Consumer Federation focused on bank fees. 5'The general finding was that customers who use currency exchanges willusually pay more than those who have bank accounts. In 1987, a typicalcustomer, who cashed fifty $320 payroll checks a year at currency exchangesand bought six money orders each month, could pay from $173.68 to $518per year for payment services, the average being $301.44. 5

2 By contrast, theaverage annual fee for noninterest checking was $46.80, assuming no bouncedchecks. 3 If the customer bounced four checks a year, the average costincreased to $100.14 Similarly, a study by Kathryn Peyton of paymentservices in two low-income San Francisco neighborhoods concluded that an

Live Crew jacket. When that bank reports to a government agency, providing information foruse in considering lifeline legislation, it is likely to state its policy, not its practice. Cf. 1989House Hearings, supra note 29, at 28-29 (statement of Peggy Miller, Legislative Representative,Consumer Federation of America) (regarding bank claims that they offer lifeline accounts).

47. T. Ciaglo & A. Fox, National Survey of Check Cashing Outlets 2-3 (ConsumerFederation of America, Dec., 1987) (unpublished survey; copy on file with the Indiana LawJournal).

48. Id. at 2.49. Id. at 2-3.50. P. Miller & D. Lever, Check Cashing Outlet Fees Still High and Climbing 3-4 (Consumer

Federation of America, Dec., 1989) (copy on file with the Indiana Law Journal). In theupdated study, the mean charge for government or payroll checks was about 1.7% of the facevalue. Id. at 2-3. The mean charge for cashing personal checks had increased from 4.5%o to7.7%. Id. at 3-4. However, the percentage of check cashing outlets willing to cash personalchecks increased from 19% to 31%. Id. at 3. It is possible, therefore, that the increase in themean charge resulted from the entry of new firms into this market and reflected these firms'higher estimate of the risk involved in offering the service. This is supported by the fact thatthe low end of the range of charges remained essentially unchanged between 1987 and 1989(1.6% to 1.66%), but the high end jumped from 12% to 20%. Id. at 4.

51. A. Fox & K. McEldowney, supra note 23, at I.52. T. Ciaglo & A. Fox, supra note 47, at 4.53. A. Fox & K. McEldowney, supra note 23, Table 1. The figure, computed on a monthly

basis, is $3.90 per month or 23¢ per check. Each $320 payroll check would cost $5.44 to cashat the mean 1987 rate. Id.

54. Id. Table 4.

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average consumer would pay from $3.50 to $10 per month for a checkingaccount but $12 to $31.05 if she relied on currency exchanges. 55

These studies are more reliable than the interview inquiries into consumerbehavior, since they are based on observable facts. None of them are trulycomprehensive, however, since their samples were limited; the ConsumerFederation study surveyed only sixty currency exchanges. More importantly,the data that these studies provide must be interpreted before reliableconclusions can be drawn from them. The most basic limitation of empiricalresearch, however, is that it only answers the questions that are asked. Inthe lifeline services debate, those questions have revolved around the ad-vantages and disadvantages of a single policy device: compelling banks tooffer checking accounts at below-market rates. The real questions arewhether this device can achieve its goal under any empirical conditions andwhether there are other mechanisms that would do so more effectively.

II. AN ANALYSIS OF THE Ln EINE PROPOSAL

The term "lifeline" is a public relations masterstroke, but bankers areprobably correct in asserting that it overdramatizes the problem. No one'slife is in danger as a result of high bank charges; the issue, rather, iswhether some people are paying more than they need to, or more than theyshould, for payment services. That is a matter that can be analyzed througheconomic analysis of law.5 6

From the economic perspective, the goal of those who favor lifelineservices is openly redistributive. In their view, low-income people shouldreceive certain payment services at below-market rates as a matter of socialequity. The argument is not based on any claim that payment services areinefficiently priced. Quite the contrary, it is the efficient pricing of theseservices that is the source of the problem. By eliminating the price caps ontransaction account interest, thereby eliminating the cross subsidy in favorof these accounts, deregulation has exposed low-income consumers to thefull rigors of an efficient market. Proponents of lifeline banking favor a

55. K. Peyton, supra note 23, at 42-43.56. Many readers of law and economics literature might conclude that economic analysis

would be unalterably hostile to the lifeline concept. But this confuses the methodology of legaleconomics with the goal of economic efficiency. The methodology can be used in the serviceof any goal within the economic realm. It may produce more defimitive results when efficiencyis chosen as the goal, but this is a limitation of the discipline, not a normative argumentgoverning its use. Moreover, considerations of efficiency are never entirely absent even ifefficiency is not the primary objective. We almost always want to achieve the objective wehave chosen in an efficient manner. An artist painting a picture is motivated primarily by thedesire to create beauty, but she would generally want to do so efficiently; that is, she wouldwant to minimize her expenses for paints, studio space, and so forth. An efficiency-basedeconomic analysis almost always has a role in public policy, therefore, regardless of the ultimateobjective.

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new subsidy for these people to counteract the effects of these deregulatorydevelopments. The rationale is analogous to the argument for providingfood stamps, which are not designed to remedy an inefficiency in the marketbut to provide low-income people with a subsidy so that they can buy morefood.1

7

Despite its redistributive goal, as opposed to an efficiency goal, theargument for lifeline services can be legitimately analyzed in economicterms. The crucial issues are the extent to which low-income people wouldbenefit from being offered checking accounts at below-market rates andwhether these benefits could be achieved more efficiently-that is, at lowercost-by other means. To answer these questions, we need to know whetherpeople without checking accounts are paying more for payment servicesthan the market rate, and thus (presumably) paying more than those whouse these accounts. If they are not, offering them below-market accountsis a pure subsidy, an in-kind grant to an identified group. In contrast, ifpeople without checking accounts are paying more, providing low-costaccounts might be a way of equalizing the position of those people. Itwould still be a wealth transfer, but its purpose would be to correct aninequality in the pricing system.

Despite the empirical work performed to date, one cannot be certainwhether checking accounts are more or less expensive than alternate paymentsystems. In the face of such empirical uncertainty, the best course is toanalyze both possibilities. This provides a way of assessing each element ofthe problem and might even generate an answer that would be preferablein either situation.

A. Lifeline Banking as Redistribution

We can begin with the possibility that people without checking accountsare not paying more for payment services. In that case, offering below-market services would nevertheless benefit those eligible because it wouldenable them to obtain payment services more cheaply. It would represent awealth transfer, whereby resources are transferred from some other sectorof society to those with lower incomes. Lifeline banking would certainlyhave this effect upon people who already possess checking accounts butwho were eligible to shift their account to lifeline status.

In-kind wealth transfers have been severely criticized in public financetheory, and all those criticisms are applicable-some with increased force-to lifeline banking. To begin with, in-kind transfers are less efficient than

57. See generally K. CARusoN, FooD STAn's An NrmuTmoN (1975); M. MAcDONALD,FooD, STAmpS, AND INcomE MAINTENANCE (1977); Giertz & Sullivan, The Role of Food Stampsin Welfare Reform, in WELFARE RrFou IN AMERICA 101 (P. Sommers ed. 1982). All sourcescited discuss the substitution effect in the context of the food stamps program.

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cash grants because they produce what economists refer to as a substitutioneffect s A decline in the price of a product will induce people to purchasemore of that product, to substitute that product for others. In-kind grantsare equivalent to a price decrease for people receiving the benefit. Therecipients will consume more of the subsidized product than they would ifthey had received a cash grant of the same magnitude.5 9 That is inefficientbecause the recipients could be placed in an equally good position-fromtheir own point of view-at a lower cost to society. They could be given acash subsidy equal to the value of the in-kind subsidy minus the magnitudeof substitution effectA0

The usual justification for in-kind wealth transfers is paternalism. Poorpeople are provided with food stamps to ensure that they spend the fundsthey receive on food rather than other less beneficial items, such as liquor.6'Many regard paternalistic policies of this sort as offensive because of theirunderlying assumptions about the behavior of low-income people.62 Buteven if we can justify in-kind grants of food and medical care on thesegrounds, we cannot justify in-kind grants of payment services. One mightbelieve that the poor spend their paychecks or welfare checks on the wrongitems, but no one believes that they stubbornly refuse to cash these checks.One might believe that they leave bills unpaid so that they can purchaseless necessary items, but no one believes that they do so because of thecost of checks or money orders. There are no fathers hanging out at thecurrency exchange, indulging in the evil pleasures of high-cost paymentservices while their wives and children are left at home, crying for lack ofa checking account. No matter what one's opinion of low-income people,paternalism is unpersuasive as a source of policy for the payment system.

A second difficulty with using below-market bank accounts as a wealthtransfer mechanism involves the administrative cost of operating the pro-gram.63 Some government agency must determine eligibility criteria and thenprovide the means of identifying those in the eligible category. To someextent, the magnitude of these costs depends on whether the program iscategorical or broad based, that is, whether the eligibility criteria are specific

58. See, e.g., J. HENDERSON & R. QUANDT, MICROECONOMIC THEORY: A MATHIuTicAL.APPROACH (3d ed. 1980); E. MANSFnD, MICROEcoNomcs: THEORY AND PRACTICE 84-87 (3ded. 1979).

59. See, e.g., J. STIGLr=z, ECONOMICS OF THE PUBLIC SECTOR 206-08 (1986).60. See, e.g., id. at 291-94.61. See id. at 296-97; R. MusGRAvE & P. MusORAWE, PUBLIC FINANCE IN THEORY AND

PRACTICE 102-03 (3d ed. 1980).62. Another view is that in-kind benefit programs are offensive because they are an

instrument for social control of the recipients. See, e.g., F. PrvEN & R. CLowAD, REGULATINGTHE POOR (1971).

63. See J. STatrrz, supra note 59, at 297.

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or general. 64 Specific or categorical programs are theoretically more efficientbecause they direct the benefit to those who truly need it, but they aremore expensive to administer because they require more frequent andelaborate determinations. For example, the Massachusetts lifeline law appliesto any person over sixty-five or under eighteen. 65 This scheme is relativelyeasy to administer, but its blunderbuss approach is at once over- andunderinclusive; there are obviously people over sixty-five who have no needfor subsidized payment services and people under sixty-five who need themvery much. On the other hand, a more discriminating needs-based test wouldinvolve formidable-and expensive-administrative complexities. 6

Finally, the use of below-cost checking accounts to transfer wealth isproblematic because it involves a specific tax, rather than a lump sum tax.In effect, the banks required to provide checking accounts at lower ratesare paying a tax equal to the rate differential. There is a broad consensusthat taxes of this sort are inefficient because they distort the behavior ofthose subject to the tax in unintended ways. 67 A bridge toll motivates peopleto drive by circuitous routes; a tax on bricks discourages home constructionor induces people to use more lumber. The difficulties with taxing banksby obligating them to offer below-market rates are evident. It would createan incentive for banks to close branches in areas where recipients of thebenefit live or to discourage these recipients from opening accounts.

In summary, lifeline accounts are an inefficient and thus undesirable wayof transferring wealth to the disadvantaged. If society wants to transfermore wealth to them, it should give them money raised from general taxes.If the poor do not pay more for banking services, there is no reason toprovide them with below-market accounts.

B. Lifeline Banking as Equalization

The previous argument, however, does not conclude the inquiry. Whilethe empirical evidence is incomplete, the available data suggest that low-income people do in fact pay more for banking services. Cashing checks at

64. See R. MusGRAVE & P. MUSGRAVE, supra note 61, at 554-58; J. STiLrrz, supra note59, at 297-300.

65. MASS. ANN. LAWS ch. 167D, § 2 (Law. Co-op. 1987).66. This same point could be made, and has been made, about any redistributive program.

But these costs must be incurred anew each time a program is created. Aid to Families withDependent Children (AFDC) involves significant administrative costs, but those costs are fixed;to increase the amount of aid would involve relatively trivial cost increases. If one wants totransfer wealth to low-income people, one can do so more efficiently by augmenting an existingprogram, such as AFDC, than by creating a new one.

67. See J. DuE & A. FRIEDLAENDER, GovERNMENT FINANCE: ECONOanCS OF THE PUBLICSECTOR 200-04 (6th ed. 1977); A. HARBERGER, TAXATION AND WELFARE (1974); R. MUSGRAVE& P. MUSGRAVE, supra note 61, at 303-24; Break, The Incidence and Economic Effect ofTaxation, in THE ECONOMICS OF PUBLIC FINANCE 122 (1974).

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currency exchanges and buying money orders are probably more expensivethan using a transaction account offered by a bank. 68 The ABA's UnidexSurvey does not refute this observation; at most, it indicates that lowerincome consumers prefer using other means of payment.69 In summarizingthe implications of the Unidex Survey, the ABA attached great significanceto the fact that most low-income consumers did not mention price as areason for their lack of a checking account. This only confirms that checkingaccounts are probably cheaper than the alternatives. It does not necessarilylead to the conclusion that the ABA would like to draw, which is thatfurther lowering the price of checking accounts would be of no use to theseconsumers. To determine the validity of that proposition, one needs a betterunderstanding of the reason why low-income consumers are probably willingto use higher cost methods of payment.

There are two possible explanations for this phenomenon, the first re-sulting from rational behavior and the second-much disfavored by econ-omists-resulting from behavior that is more emotional, though not necessarilyirrational. The rational explanation is that alternative payment mechanisms,while higher in price, provide other advantages that compensate for theprice differential. Most obviously, these alternative mechanisms are moreconvenient than banks. Currency exchanges, for example, are open muchlonger hours, even allowing for the extended hours that banks now offer.70

According to the Peyton study, one check-cashing store in San Franciscowas open from 9:00 a.m. to 9:00 p.m. Monday through Saturday and from9:00 a.m. to 6:00 p.m. on Sunday. 71 The advantages of these extended hoursfor working people are apparent. In addition, the currency exchanges areusually small storefront operations, more numerous and more convenientlylocated than banks.72 Money orders are often available at stores such assupermarkets and drugstores, which are open longer hours and are moreconveniently located than branch banks.73 A rational consumer may well bewilling to pay more for payment services in order to obtain these advantages.

A second possibility is that low-income consumers use alternative, higher-cost payment mechanisms for emotional reasons. They may find a bank'sstern glass and concrete architecture as intimidating as the Ionic columns

68. See supra text accompanying notes 47-55.69. AmE~iac BANcans AssocutlION, supra note 32.70. 1989 Senate Hearings, supra note 12, at 55-56 (statement of Jerome S. Gagerman,

President, National Check Cashing Association); id. at 149 (remarks of Sen. Dixon); see 1989House Hearings, supra note 29, at 78 (remarks of Howard B. Brown, Connecticut BankingCommissioner).

71. K. Peyton, supra note 23, at 36.72. See sources cited supra note 70.73. See T. Ciaglo & A. Fox, supra note 47, at 3 (Of the 60 currency exchanges surveyed

in Consumer Federation of America National Survey of Check Cashing Outlets, 55 sold moneyorders.); K. Peyton, supra note 23, at 36-37, 40-41.

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and imitation marble of the prior era. They may feel unwelcome if a bankhas long lines, harried tellers, and snooty officers. They may be suspiciousof bank practices, or they may not understand how transaction accountswork.7 4 There is a certain amount of evidence to support these suppositions.In the Unidex study, some twelve percent of the people who closed theirchecking accounts reported that they had trouble keeping their accountrecords balanced, and a small number reported that they did not trustbanks.75 A study of Hispanic consumers revealed that only one-third hadchecking accounts, possibly because they felt unwelcome in banks or becausethey did not trust them.76

Whichever of these explanations is correct, requiring banks to providebelow-market rate accounts would not solve the inequality problem. If manylow-income consumers are choosing higher-cost payment alternatives becauseof their convenience or their noneconomic appeal, lowering the cost ofchecking accounts still further is unlikely to alter these established behaviorsto ahy significant extent. Of course, lowered costs would probably havesome effect; one can confidently predict that if the cost of a service islowered, more people will use that service. But the elasticity of demand isprobably quite low, since the consumers involved are not price sensitive inthe first place. Given the complexity of prices for banking services, more-over, even significant changes in checking account charges would probablynot be communicated to low-income consumers without aggressive market-ing, and aggressive marketing will not be forthcoming from institutions thatare being compelled to offer the accounts at a loss.

In short, the difference between banks and alternative payment providers,in terms of both convenience and emotional effect, is large and qualitative,probably too large for a moderate price change to affect. In order toproduce a real increase in demand, it might be necessary to decrease theprice to zero, or below zero; that is, to pay people for opening a bankaccount. This seems inefficient because the social resources needed tosubsidize bank accounts so heavily would far exceed the benefit derivedfrom inducing people to acquire them. By choosing a social mechanism thatdoes not address the real problem, one must use a very large amount ofbait to catch a very small redistributive fish.

But this only states part of the problem with the idea of lifeline banking.As previously noted, requiring banks to provide below-market checkingaccounts constitutes a special tax on them; all taxes of this sort exercise

74. See UNITED STATES GENERAL ACCOUNTING OMCE, supra note 45, at 25-27; AmRCANBANKERS ASSOCIATION, supra note 32. All these reactions, if true, would seem to stem fromthe same source: a lack of familiarity with banks.

75. AidMwcA BANKERS ASSOCIATION, supra note 32, at Q4.76. Alaniz & Gilly, The Hispanic Family-Consumer Research Issues, 3 PSYCHOLOGY &

MARKETING 291, 301 (1986).

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distorting effects upon behavior." In this case, the effect would entirelyundermine the program; it would lead banks to act in ways that decreasethe number of low-income people who use checking accounts. Forced tooffer accounts at lower rates, banks would cut back on services, either torestore their profit margin or to discourage people from making use ofsuch accounts. Lines would get longer, tellers more harried, and bankofficers more snooty. Banks might choose to close branches in low-incomecommunities to avoid having to offer lifeline accounts. This would amplifythe very reasons why low-income people presently do not use bank accounts;it would make banks less convenient and less inviting. One could hardlyexpect banks to provide more services, or welcome customers with moreenthusiasm, when they would lose money on them.

This situation would be the converse of the one that prevailed before1980. At that time, banks were forbidden to pay interest on deposit accounts,which meant, in essence, that they were compelled to charge higher pricesfor these accounts than they would have otherwise. They responded byoffering additional services to attract accounts; they opened new branches,hired additional tellers, advertised heavily, and offered free gifts to newcustomers. 78 If banks were required to charge lower prices than they oth-erwise would, they would provide fewer services. In all probability, no bankwould require customers to give it a toaster before allowing them to openan account, but many would provide fewer branches, fewer tellers, and lessaggressive marketing.

The fact that lifeline banking does not seem to solve the problem ofhigh-cost payments does not mean that no problem exists. One could onlyreach this conclusion by giving normative significance to the market's factualconditions. It may be true that banks are already the lowest-cost providersof payment services and that those who do not open checking accounts doso for economic or emotional reasons that would not be affected by stilllower prices at the bank. Nonetheless, the poor pay more, 9 and this createsa social problem. Inequalities of wealth are themselves problematic, althoughmost people in our society regard them as inevitable. But there would seemto be no need to add inequalities in the price of services to the inequalitiesthat are necessarily a part of our system. Clearly, it is undesirable for low-income consumers to pay more for a given service, thus spending a dispro-portionately large share of their lesser means for that purpose. While thecall for lifeline services may not be an appropriate response, it has at leastdirected our attention to a real problem.

77. See supra text accompanying note 67.78. See supra note 9 and accompanying text.79. See supra note 2.

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III. DEREGULATION AS AN ALTERNATIVE SOLUTION

The basic difficulty with the lifeline banking proposal is that it constitutesa reflexive response to the problem it addresses. Low-income people seemto pay more than others for payment services; lifeline banking would compelbanks to charge them less. This represents a rather direct effort to achievesocial equity, but it ignores basic principles of economics. Regulating theprice of banking services is generally inefficient; it distorts incentives andfails to address the convenience or emotional concerns that seem to motivatelow-income consumers. An alternative approach is to use economic analysisto generate an efficient solution to the problem. The goal would continueto be social equity, but the aspiration would be to achieve that goal in aneconomically efficient manner.

If payment services for low-income consumers are priced undesirablyhigh, the natural economic explanation is a lack of competition. Bankaccounts may be relatively inexpensive, but they cannot compete directlywith currency exchanges; they are either too inconvenient, too intimidating,or, most likely, a combination of the two. The efficient solution, therefore,would be to identify some other source of competition for both types ofinstitutions. Whether that would lead to lower prices depends on the reasonwhy banks and currency exchanges currently charge the prices that they do.This inquiry relies, in turn, on empirical evidence that is not fully available,but the idea seems sufficiently promising to merit further inquiry.

A. Retailers as Providers of Payment Services

The most obvious sources of competition for banks and currency ex-changes are retail chains, such as supermarkets. 0 They already serve as analternative provider of payment services in many cases; supermarkets areoften willing to cash their customers' paychecks, usually by accepting thecheck as payment for groceries and returning the difference in cash.,' Asupermarket could serve as the location for the delivery of payment servicesin two ways: it could provide a location for a branch of an existing bank,

80. See 1989 Senate Hearings, supra note 12, at 149 (remarks of Richard Loundy, Chairmanof the Board, Devon Bank, Chicago, Ill.); UNITED STATEs GENERAL AccoUNTING OFFICE,supra note 45, at 398. Drug stores, appliance or hard goods stores, and video rental storeswould also be likely possibilities. Another possible payment provider would be post offices,which currently sell money orders. In Europe and Japan, post offices play a major role inproviding financial services to consumers. However, supermarkets are probably the mostpromising possibility and will be the focus of the discussion here.

81. Available empirical studies confirm the existence of this practice, although they differas to its extent. 1989 Senate Hearings, supra note 12, at 149 (remarks of Richard Loundy,Chairman of the Board, Devon Bank, Chicago, ILL.); UNITED STATES GENERAL AccoUNTINGOFFcE, supra note 45, at 398; K. Peyton, supra note 23, at 37.

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or it could be authorized to function as a bank, as a depository institution,itself.

The Comptroller of the Currency's rules for approving branch applicationsby national banks have been liberalized to the point where these bankscould open branches in supermarkets or similar locations without legalimpediment.8 2 Whether this would make economic sense for banks is adifferent question, however. Most banks feel they have enough branchesalready, or indeed too many, as a by-product of interest rate regulation.Moreover, much of the lifeline problem stems from the banks' economicdecision that they will not make money by aggressively or creatively pursuinglow-income markets.

Authorizing retailers to serve as depository institutions themselves, wherecustomers could open accounts for third-party payment and cash checks,might be a more promising approach. Supermarket chains, for example,already serve the low-income community. Their stores are generally locatedto be convenient to consumers, rather than being concentrated in city centersand thus absent from low-income neighborhoods, as banks are. To accom-modate people's buying patterns, they are open long hours, includingevenings and weekends. In fact, they are more convenient than currencyexchanges because consumers go to them anyway, quite apart from anyneed for payment services, and probably do so with the same or greaterfrequency than they go to any payment provider. Thus, most people wouldbe able to use a transaction account at a supermarket without adding anyadditional stops to their daily itineraries. If low-income consumers prefercurrency exchanges to banks because of rational considerations of conven-ience, then supermarkets would provide an attractive alternative.

The same would be true if the preference for currency exchanges stemsfrom emotional sources. There is nothing intimidating about a supermarket.While the lines may be as long as bank lines and the check-out clerks asharried as the tellers, the fact remains that consumers, including low-incomeconsumers, regularly go to supermarkets. The apparently successful imple-mentation of a major wealth transfer program-food stamps-throughsupermarkets confirms their accessibility to low-income customers. Of course,some consumers may find the management of a transaction account bur-densome and prefer the more simple, if less convenient, process of cashingchecks and buying money orders. But supermarkets could offer these servicesas well. They would have all the facilities needed to provide services identicalto the currency exchanges, and they would possess the additional ability tooffer a deposit account.

82. See 12 C.F.R. § 5.30(c)(1) (1991) ("[I]t is the general policy of the Office to approveapplications to establish and operate branches and seasonal agencies, provided that approvalwould not violate the provisions of applicable federal or state law .... ).

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Current federal policy provides another reason for allowing retail chainsto offer accounts. The federal government is convinced that the mostefficient way for it to distribute benefits is by electronic transfer. It isattempting to arrange the direct deposit of social security, veteran's benefits,and other payments into the recipients' accounts, a process which it hopeswill lower costs and reduce losses from theft. 3 This requires an account ofsome sort, and concern has been expressed about the practicality andconvenience of the government's approach for customers who lack accountsof their own.84 By authorizing retailers to offer accounts, the number ofaccount holders would increase, and the process of electronic benefit transfercould be greatly facilitated.

The ability of supermarkets and other retail chains to compete effectivelywith currency exchanges would not necessarily lead to decreased prices.Currency exchanges, after all, compete among themselves, even if they donot compete with banks because they appeal to different markets. Unlessthere is a market failure of some sort, the price currency exchanges chargefor various services should already be at the competitive level. To be sure,the industry has developed a reputation for price gouging and has been thesubject of regulation in some states as a result of this perception.,5 But themechanism that would enable currency exchanges to charge noncompetitiveprices is unclear. The industry is not monopolized and, given its low costof entry, probably could not be. Information asymmetry is minimal; cus-tomers are necessarily aware how much their checks are being discountedand how much they are charged for money orders. Undoubtedly, there areimperfections in this market as there are in any other: communities withonly one facility, occasional price-fixing agreements, or scattered predatorypractices. But there is little evidence of any systematic market failure withinthe check-cashing industry.

Nonetheless, prices for payment services would probably be lower insupermarkets than at the currency exchanges, not because of market failureswithin the check-cashing business, but because transaction accounts aremore efficient than individualized check cashing and money order purchases.The risk of fraud decreases when customers have ongoing relationships with

83. See FINANCIAL MANAGEMENT SERVICE, DEPARTMENT OF THE TREASURY, FROM PAPER TOPLASTIC: THE ELECTRONIC BENEFr TRANSFER REVOLUTION (1990).

84. See 1989 House Hearings, supra note 29, at 30-31 (statement of Jack Guildroy, Member,Board of Directors, American Association of Retired Persons); 1989 Senate Hearings, supranote 12, at 72 (remarks of Senator Dixon and William Douglas, Commissioner, The FinancialManagement Service, Department of Treasury).

85. See, e.g., CONN. GEN. STAT. ANN. §§ 36-564 to -573 (West 1987 & Supp. 1991); MINN.STAT. ANN. §§ 53A.01 to .14 (West 1988 & Supp. 1991); N.Y. BANKING LAW §§ 366-374(McKinney 1990). On price gouging by currency exchanges, see supra text accompanying notes47-55; 1989 Senate Hearings, supra note 12, at 64 (statement of Rosemary Dunlap, VirginiaCitizens Consumer Council).

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the payment provider. To put this matter another way, the existence of anaccount permits the provider to collect identifying information once, ratherthan doing so each time the customer wants to cash a check. In addition,third-party payments are less expensive with transaction accounts becausethey can be processed in bulk. A money order requires an individualizedtransaction, in which an employee collects the money and fills out the form.Checks, by contrast, are filled out by the customer and processed by high-speed machinery.a6

Finally, transaction accounts decrease the amount of cash that the pay-ment provider must have available at any given time. Rather than cashingan entire paycheck, the customer can deposit her check and withdraw theamount she needs. Third-party payments require no cash on hand at allsince they are processed by debiting the account balance, whereas moneyorders are generally bought for cash. Reducing the amount of cash on handdecreases the risk of theft, by either outsiders or employees. More important,cash does not earn interest, whereas account balances can be used for avariety of income-earning purposes.

Aside from the greater efficiency of transaction accounts, retail chainsauthorized to function as depository institutions would also be more efficientthan currency exchanges, due to various economies of scale. They couldoperate depository services in their existing facilities instead of establishinga separate physical location. This would not decrease the need for directcustomer service staff, like tellers, but it would permit combined use ofsecurity, janitorial, secretarial, and supervisory employees. It would alsoreduce the costs of construction, plant maintenance, and real estate taxes.In a competitive environment-which should exist, given the number ofretail chains-these savings would be passed on to the consumer throughlower charges.

Another possible advantage is that retail chains might be willing to acceptlower profit margins on their payment services in exchange for increasedvolume, and thus increased profits, in their primary business. The availabilityof payment services would likely be a significant competitive advantage forany retailer. This would be particularly true of supermarkets, which are thestores to which people go most regularly and where many people, particularlythose in the low-income group, spend the largest proportion of their availablefunds.87 Consequently, retailers might be willing to cross-subsidize paymentservices, at least to a limited extent.8

86. A depository institution can also provide other services that low-income consumersdesire but cannot obtain from a currency exchange, such as savings accounts, safe-depositboxes, and cashier's checks. See 1985 Senate Hearings, supra note 15, at 46 (statement ofStephen Brobeck, Executive Director, Consumer Federation of America). Banks can provideall these services, of course, but only if low-income customers are willing to use them.

87. W. NICHOLSON, INTERMEDIATE MICROECONOMIC THEORY AND ITS APPLICATIONS 86 (1987).88. These last two factors-economies of scale and cross-subsidies-could operate in reverse,

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The basic virtue of addressing the lifeline banking problem by authorizingretail chains to provide payment services is that it would lead to the lowestprices. The empirical question of whether banks or currency exchanges arethe lowest cost provider may be unresolved, but its resolution is not crucial;there is reason to think that retail chains would provide these services morecheaply than either of the existing providers. Moreover, even if this sup-position is false, no harm would be done; deregulating, as opposed toregulating further, does not entail any direct social costs. If retail chainscannot offer cheaper payment services-if banks or currency exchanges arereally the optimal providers-the retailers simply will not enter the market,or they will try to do so and abandon the attempt.

B. The Regulation of Risk as a Problem and Solution

For deposit accounts offered by retail chains to be viable options forconsumers, the consumers' deposits must be insured by the federal govern-ment.8 9 Most consumers expect this and would be reluctant to place theirfunds in any uninsured account. In the past, states would insure certainaccounts, but the failure of state insurance funds in Maryland and Ohiohas communicated the clear message that state-sponsored insurance fundsare unreliable.9 Certainly, if one wants to attract new customers, and ifthese customers have stayed away, at least in part, because they are fearfulof banks, one would want to provide as many assurances as possible. Thismeans federal deposit insurance.

Deposit insurance, together with control of the money supply, is thedriving force behind the regulation of the financial services industry. Whena financial institution holds insured deposits, it is in effect holding publicfunds since the insurance fund, and ultimately the government itself, isresponsible for any loss. As a result, the authority to accept insured depositsis inevitably attended by public scrutiny over the level of risk that theinstitution incurs.

While this adds complexity to the idea of authorizing retailers to offerdeposit accounts, it also creates some interesting possibilities. In our econ-

with retailers using payment service profits to lower prices on their primary product. Alter-natively, retailers could raise prices because of the increased convenience of the service. Ineither case, consumers would be getting something for their money-lower commodity pricesor increased convenience and an increased number of competitors. Other things being equal,this would necessarily increase consumer welfare, regardless of the nature of the benefits.

89. Federal insurance is provided for by the Federal Deposit Insurance Act, Pub. L. No.81-797, 64 Stat. 873 (1950), as heavily amended by the Financial Institutions Reform, Recoveryand Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, 103 Stat. 183 (codified at 12U.S.C. §§ 1811-1832 (1988)).

90. See 1985 Senate Hearings, supra note 15, at 397-98; Miller, The Future of the DualBanking System, 53 BROOKLYN L. REV. 1, 19 (1987).

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omy, risk translates rather directly into return; the greater the risk of aparticular investment, the higher the return it must offer. 9 When thegovernment assumes risk, therefore, it creates a powerful and flexible policyinstrument, because assuming part or all of a firm's risk is equivalent togranting it a greater return.

The deposit insurance system has not fared well in recent years, and thereare now numerous proposals for the reform of the entire structure.9 2 Theseproposals raise a range of complex issues which have no particular relevanceto payment services for low-income consumers, and they are consequentlybeyond the scope of this discussion. For the moment, we can assume thatwhatever scheme of deposit insurance and regulation applies to transactionaccounts at banks would also apply to those offered by retailers. Currently,each firm that receives insured deposits pays a fee to the insurance fund,computed as a percentage of its deposits.93 A federal agency, restructuredunder recent legislation, administers the insurance funds and supervisesinsured institutions.Y It has extensive powers; it cannot actually close aninstitution, as state or federal chartering authorities can, but it has a nuclearweapon of its own in its power to cancel the insurance, as well as a hostof lesser sanctions. 9

5

All of these regulatory rules could be applied to depository institutionsowned and operated by retail chains. 96 Two difficulties that might emerge,

91. See R. BREALEY & S. MEYERS, PRINCIPLES OF CORPORATE FINANCE 125-203 (1988); W.SHARPE, Ii EsT ENTS 6-10 (1985); Sharpe, Capital Asset Prices: A Theory of Market Equilib-rium Under Conditions of Risk, 19 J. FIN. 425 (1964).

92. See, e.g., Deposit Insurance Reform and Related Supervisory Issues: Hearings Beforethe Senate Comm. on Banking, Housing, and Urban Affairs, 99th Cong., 2d Sess. (1986)[hereinafter 1986 Senate Hearings]; Reform of the Nation's Banking and Financial Systems:Hearings Before the Subcomm. on Financial Institutions Supervision, Regulation and Insuranceof the House Comm. on Banking, Finance and Urban Affairs, 100th Cong., 1st Sess. (1987);FEDERAL DEPOSIT INSURANCE CORP., MANDATE FOR CHANGE: RESTRUCTUtRE TH BANKINGINDUSTRY (1982), reprinted in id. at 130; E. KANE, THE GATHERING CRISIS IN FEDERAL DEosrrINsURANCE (1985); Brooks, Insuring Confidence-Deposit Insurance Reform: A Conference, 5ANN. REv. BANKING L. 111 (1986); Garten, Banking on the Market: Relying on Depositorsto Control Bank Risks, 4 YALE J. ON REG. 129 (1986).

93. 12 U.S.C. §§ 1815, 1817 (1988 & Supp. 1 1989-1990). The fee is set by a formula thathas become more complex over time. It is computed against an assessment base that includesuninsured deposits, id. § 1817(b)(2); thus, the law creates a subsidy from banks with highproportions of uninsured deposits, generally money center banks, to banks with low proportionsof such deposits, that is, smaller commercial banks and thrifts. This is an example of the useof deposit insurance as a subsidy mechanism. Cf. infra text accompanying notes 104-06(proposal for another type of subsidy using deposit insurance).

94. The agency is the Federal Deposit Insurance Corporation (FDIC). Under FIRREA, seesupra note 89, the FDIC supervises two funds: the first is the Bank Insurance Fund (BIF),which continues the pre-FIRREA FDIC fund, and the second is the Savings AssociationInsurance Fund, whose optimistic acronym is "SAIF," the successor of the Federal Savingsand Loan Insurance Corporation, and thus the guarantor of deposits in a vast number ofunsafe, and indeed insolvent, institutions. 12 U.S.C. § 1818.

95. 12 U.S.C. § 1818.96. Presumably, these institutions would be subsidiaries of a larger company, rather than

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however, in regulating depository institutions owned and operated by re-tailers are the riskiness of the firm and the multiplicity of the firms thatwould require regulatory supervision. The horrible that comes to mind ishaving depository institutions in thousands of tiny, economically unstableretail firms like corner liquor stores or mom-and-pop :groceries. This problemcould be readily solved, however, by limiting the authorization to firmswith relatively high asset levels. For example, the minimum asset level couldbe set as high as $500 million.97 Firms of this size are not likely to becomeinsolvent, unless there is a general economic disaster, and they wouldconstitute a delimited regulatory responsibility. Yet virtually all of them arelarge chains, with widely distributed outlets. Collectively, they would reachvirtually every community in the country and could thus meet the needs oflow-income consumers for convenient banking services.

This might be contrasted with the situation in the existing financial servicesindustry. At present, there are over 14,000 commercial banks in the UnitedStates and fully 35,000 institutions authorized to receive insured deposits.98

Some 300 of the commercial banks have less than $25 million in assets-mom-and-pop banks, in effect." As we have learned from the savings andloan crisis, they are small enough to be taken over by individual quick-buck artists, compulsive gamblers, and outright criminals.1l° Large retailchains are models of commercial responsibility by comparison.

Current legislation also regulates risk by limiting the types of investmentsthat can be made with these insured deposits. At present, banks, savingsand loans, and other depository institutions are limited by law to commercialloans, real estate loans, money market funds, and other relatively low-risk

independent entities. But that is true of many existing depository institutions. Virtually alllarge commercial banks are organized as holding companies that own a bank or a group ofbanks as subsidiaries, as well as other subsidiaries, such as foreign banks, brokerage houses,and financial c~nsultants, that fall under different regulatory regimes. See BOARD OF GOVEuORSOF THE FEDERAL RESERVE SYsTEM, THE BANK HOLDING COMPANY MOVEMENT TO 1978: ACoMPENDIuM (1978); Mann, The Reality and Promise of Bank Holding Companies, 90 BANKINGL.J. 181 (1973); Shapiro, The One-Bank Holding Company Movement: An Overview, 86BANKING L.J. 291 (1969). In December of 1989, the largest United States commercial bankthat was not controlled by a United States holding company ranked 24th in total assets outof all commercial banks, and only eight of the top 100 were not controlled by United Statesholding companies. AM. BANKER, Top NUMBERS: PART Two 18, 61 (1990) [hereinafter TopNUMBERS]. Many of these were simply subsidiaries of foreign banks, such as Bank of Tokyo,Sanwa Bank, and Industrial Bank of Japan. Id.

97. This would include all the firms on the 1991 Fortune list of America's 50 top retailers.See FORTUNE, June 3, 1991, at 274-75.

98. See T. MAYER, J. DUESENRERRY & R. AUIBER, MONEY, BANKING AND THE ECONOMY42-43, 71-76 (2d ed. 1984).

99. THE CONFERENCE OF STATE BANK SUPERVISORS, A PROFILE OF STATE-CHARTEREDBANKING 13, 237 (12th ed. 1988). Another 600 have under $50 million in assets.

100. See E. KANE, THE S & L INSURANCE MESS: How DID IT HAPPEN? (1989); Atkinson,Justice Says Long Arm of Law Reaching More S & L Cases, BANKING WK., Aug. 20, 1990,at 2 (FBI had 404 cases pending against thrift institutions at the end of 1989).

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and appropriately "financial" activities. 0' There is no reason why retailersneed to follow the same rules as banks; they could be subject to eitherstricter or more lenient regulations. This would allow further limitation ofthe risk involved in authorizing retailers to offer deposit services, but italso raises the possibility of subsidizing those services by permitting greaterrisk.

If there are concerns that retail chains are less stable or less trustworthythan banks, their use of deposited funds could be subjected to greaterrestrictions than those applied to existing depository institutions. For ex-ample, retailers could be required to invest these funds only in treasurybills, state or municipal bonds, or qualified money market funds. 0 2 Thiswould virtually eliminate any risk to the insurance fund; treasury bills, forexample, are at least as reliable as federal deposit insurance because theyrepresent an equivalent obligation on the part of the United States Treasury.Despite these restrictions, retailers could still operate payment services at aprofit. The interest rates on these investments exceed the market rates ofinterest on transaction accounts, particularly since the market rate for alow-balance account may be zero. However, any restriction on the amountthat retailers could earn from deposited funds would be reflected in pro-portionately higher service charges to customers. At some point, thesecharges would price retailers out of the market or, if consumers preferredthem as payment providers for emotional reasons, would impose costs thatwould vitiate the purpose of allowing them to accept deposits in the firstplace.

A preferable option is to permit retailers to use deposited funds for thesame purposes as existing depository institutions use them. They could thenmake commercial loans, real estate loans, and consumer loans, in additionto investing in financial instruments. Retailers could earn the same rate ofreturn as banks and could thus cut the costs of operating a depositoryinstitution. Of course, many retailers would not want to establish a lendingoperation, but there would be no need for them to do so. Given the highlydeveloped nature of American financial markets, it is easy enough to transferfunds from the institution that generates them to one that can use them.

101. See infra text accompanying notes 115-29.102. For a related proposal, see R. LrrAN, WHAT SHOULD BANKs Do? 164-89 (1987). Litan

proposes that deposit taking be separated from lending. Firms authorized to accept deposits,he writes, "would be required to operate as (insured) money market mutual funds, acceptingdeposits and investing only in highly liquid safe securities, or in practice, obligations of theUnited States Treasury or other federally guaranteed instruments." Id. at 165. In Litan'sproposals, such firms, called "narrow banks," could be owned by holding companies thatalso owned firms engaged in commercial lending and other financial activities. Id. But thereis no reason why these narrow banks could not be owned by commercial firms; the risk wouldhave been limited by the restrictions on the narrow bank's investments.

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The simplest example is the federal funds market, which enables regionaland local banks to "sell" their deposits to money center banks with moreextensive lending opportunities. 03

Still another possibility, and one that might be even more desirable onsocial policy grounds, would be to impose fewer restrictions on certainaccounts than are currently imposed on banks. The most radical version ofthis idea would be to impose no restrictions at all. In that case, the fundscould be used by the firm receiving them as an internal source of capital;that is, for buying inventory, building facilities, or conducting day-to-dayoperations. This would be highly advantageous for the firm, because con-sumer deposits are a relatively inexpensive source of funds. Interest-bearingtransaction accounts, for example, generally pay four percent, whereas theprime rate, which represents the cost of funds obtained from outside sources,is currently 6.5%.104

The disadvantage of permitting any firm to use insured deposits as aninternal source of capital is the increased risk imposed on the insurancefund, and ultimately on society at large. There would be no separate asset,such as treasury bills or commercial loans, to secure the deposits; the firm'sability to repay its customers would depend on its overall financial health.In effect, a firm using insured funds as internal capital would be receivinga subsidy from firms whose use of deposited funds remained restricted,with the amount of the subsidy being determined by the firm-specific risk.Moreover, the subsidy lacks the political accountability of a direct cashpayment; it does not require an appropriation when enacted but only onthat uncertain, undetermined day when disaster strikes. The current stateof the deposit insurance funds bears witness to this phenomenon.

But a subsidy that operates through the deposit insurance system wouldhave a number of advantages, despite its risks. In a competitive market,the cost of the subsidy would be passed on to the depositors in the formof either increased interest payments or decreased service charges. Thus, thecustomers whose funds could be used in this way would be subsidized. Thisis a much more efficient subsidy than legislating lower service costs; itincreases, rather than decreases, the firm's motivation to serve the subsidizedcustomers. Since eligible deposit funds would be an inexpensive source ofcapital, firms would be motivated to increase the amount of these deposits.This occurs because the subsidy is deregulatory in nature; it releases themarket rather than constraining it. Of course, it functions as a subsidy onlyto the extent that the use of other deposited funds remains regulated; if alldeposited funds were deregulated, the differential would disappear. Since

103. See M. MAYER, Ti BANKERS 215-41 (1974); M. STIGUi, THE MoNEsY MARKEr: MYTH,REA=ITY, AND PRACTICE 279-309 (1978).

104. As of Jan. 3, 1992. E.g. Manufacturers Bank Decreases Prime Rate, (LEXIS, Nexislibrary, Omni file).

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that is unlikely to occur, however, the mechanism will remain a viable onefor the foreseeable future.

To subsidize low-income customers, therefore, the government need onlyspecify that deposits from such customers would be free of regulatoryrestrictions and could be used by the firm receiving them for any purpose.One could place the burden of proving eligibility on the depository insti-tution, making the program relatively easy to administer. The institutionwould be required to demonstrate that a deposit came from a member ofthe beneficiary group before being allowed to use that deposit in anunrestricted fashion. Of course, costs are costs, no matter who bears them,and a complex eligibility requirement would still be more expensive than asimpler one. At some point, the cost of proving eligibility might becomelarge enough to eliminate the subsidy and vitiate the program. That wouldbe an error in program design, but at least it would not create an additionalcost for the government's administrative structure.

Someone must pay for any subsidy, and the cost of this one would bethe increased risk resulting from the unrestricted use of insured deposits.With proper eligibility rules for depositors, however, the risk could beminimized. For example, anyone depositing more than a specified sum, say$2000 per month, on a regular monthly basis could be deemed ineligiblefor a subsidized account. The average daily balance on accounts of this sizewould probably be at most $500, and that would be the extent of the risk.Even if ten million such accounts were in effect, the government's totalexposure would be no greater than the exposure from the nation's seventy-ninth largest commercial bank or its twenty-fourth largest thrift institution.05

In fact, the exposure is much less because the accounts would be widelydispersed, and the institutions offering them presumably would not fail atthe same time, barring a financial catastrophe that would dwarf any concernsabout low-income consumers' accounts.

It should be noted that the idea of subsidizing low-income depositors byremoving the restrictions on the use of their funds is really separate from

105. See Top NUMBERS, supra note 96. As of December 31, 1989, the 79th largest commercialbank, in terms of deposits, was Boatmen's National Bank of St. Louis, with deposits of$5,080,552,000. Id. at 11. Not all of this total is insured, of course, but the government hasrevealed a tendency to pay off all depositors, whether insured or not, when there is a majorbank failure. See Inquiry into Continental Illinois Corp. and Continental Illinois NationalBank: Hearings Before the Subcomm. on Financial Institutions, Supervision, Regulation andInsurance of the House Comm. on Banking, Finance and Urban Affairs, 98th Cong., 2d Sess.(1984).

The 24th largest thrift institution was People's Bank of Bridgeport, Connecticut, with$5,576,000,000 of deposits as of December 31, 1989. See Top NUMBERS, supra note 96.Ominously enough, no fewer than seven of the thrift institutions which had more depositsthan People's Bank had negative capital, and five of these were in the government's conser-vatorship program; that is, they were insolvent. Id. Thus, the amount of additional risk fromas many as 10,000,000 lifeline accounts would not represent a significant increase.

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that of authorizing retailers to accept deposits. The latter idea is based onthe greater convenience and comfort of retail stores: it would lower costsonly because convenient, unintimidating payment services are currentlyoffered by high-cost, nondepository institutions. The subsidy would actuallylower any institution's cost of providing payment services. It could be madeavailable to banks that service eligible customers as well as to retailers and,in fact, it should be, since many low-income consumers do use banks. Butit would be particularly effective when combined with the idea of authorizingretailers to offer deposit accounts. By deregulating both the types ofinstitutions that can offer these accounts and the range of uses for insureddeposits, one could provide a truly effective system of lifeline banking forlow-income customers.

IV. CHANGING =H LEGAL FRAMEwoRK

Solving the payment problems of low-income consumers by permittingretailers to offer deposit accounts would obviously require changes in existinglaw. To articulate a complete solution, these changes should be specified.Consideration of these changes will also serve to provide some insight intothe way one thinks about financial services, the reason why the industry isstructured as it is, and the implications of the proposed deregulation.

A. The Separation of Banking and Commerce

At present, the source of greatest controversy concerning the structure ofthe financial, services industry is the Glass-Steagall Act.' °6 A product ofFranklin Roosevelt's first "Hundred Days,"'17 the Act is designed to increasethe stability of depository institutions by separating commercial and invest-ment banking. The proposal to permit retailers to offer deposit accountsimplicates an important, related feature of our financial structure, theseparation of banking and commerce. Commerce, in this context, meanseverything except financial services-everything from retailing to manufac-turing to farming to filmmaking. A bank is not allowed to do any of thesethings, and no company that does any of them is allowed to be, or own,a bank.

The statute that most often comes to mind in connection with theseprohibitions is the Bank Holding Company Act of 19 5 6 .10s The purpose of

106. Banking Act of 1933, Pub. L. No. 73-66, §§ 16, 20, 21, 22, 48 Stat. 162 (1933)(codified at 12 U.S.C. §§ 24, 377, 378, 78 (1988)). These four sections of the larger Act thatseparates commercial and investment banking are commonly referred to as "Glass-Steagall."For an examination of Glass-Steagall and the reasons why it is controversial, see Glass-SteagallOught Not to Be a Privileged Sanctuary, Am. Banker, Aug. 16, 1982, at 4.

107. See W. LEUCHTENBURO, FR1ANrN D. ROOSmLT AND THE NEw DEAL 41-62 (1963).108. Ch. 240, 70 Stat. 133 (1956) (codified as amended at 12 U.S.C. §§ 1841-1849 (1988)).

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this Act was to "define bank holding companies, control their futureexpansion, and require divestment of their nonbanking interests."'0 9 In otherwords, the Act prohibits any firm from owning two subsidiaries, of whichone is a "bank" and the other is not. Should Sears Roebuck decide to buya bank, within the meaning of this Act, it would become a bank holdingcompany and would then be required to divest itself of its retail operations." 0

But the Bank Holding Company Act is not the basic prohibition againstthe combination of banking and commerce. It does not affect banksthemselves; it only eliminates holding companies as a device for circum-venting the underlying prohibition.' The real sources of the separationbetween banking and commerce are the various chartering acts under whichAmerican banks are constituted." 2 In this country's dual banking system,"'each state has a chartering statute, and the federal government has its own,the National Bank Act.' 14 These statutes establish the barrier betweenbanking and commerce through their definition of the term "bank."

The National Bank Act specifies the procedures for forming "[a]ssociationsfor carrying on the business of banking""' and grants banks the power toexercise "all such incidental powers as shall be necessary""16 to do so. Itthen specifies that "banking" may be conducted "by discounting andnegotiating promissory notes, drafts, bills of exchange, and other evidencesof debt; by receiving deposits; by buying and selling exchange, coin, andbullion; by loaning money on personal security; and by obtaining, issuing,and circulating notes according to the provisions of [this chapter] .11 7 Moststate statutes contain similar definitions."' These chartering statutes establish

109. Id. at 133; see Board of Governors v. Investment Co. Inst., 450 U.S. 46, 48 (1981).110. The Act does allow holding companies to acquire firms whose activities are perceived

as banking rather than commerce; the statutory language refers to activities "so closely relatedto banking or managing or controlling banks as to be a proper incident thereto." 12 U.S.C.§ 1843(c)(8). Responsibility for administering the Act was assigned to the Federal ReserveBoard, and the Fed has promulgated a regulation, designated "Regulation Y," which specifiesthese proper incidents. 12 C.F.R. § 225.21-.25 (1991). Known throughout the industry as the"laundry list," this part of Regulation Y grants banks permission to lease personal or realproperty, provide courier services for financial instruments, provide tax planning and prepa-ration services, and so forth.

I11. Moreover, the Bank Holding Company Act posed a very limited legal impedimentbefore 1987, even, for holding companies, because it contained a major loophole. See infratext accompanying notes 130-33.

112. See Halpert, The Separation of Banking and Commerce Reconsidered, 13 J. CORP. L.481, 484-90 (1988).

113. On the dual banking system generally, see Butler & Macey, The Myth of Competitionin the Dual Banking System, 73 CoRNELL L. REv. 677 (1988); Miller, supra note 90; Scott,The Dual Banking System: A Model of Competition in Regulation, 30 STAN. L. REv. 1 (1977).

114. 12 U.S.C. §§ 1-216 (1988).115. Id. § 21.116. Id. § 24.117. Id.118. See, e.g., IND. CODE ANN. § 28-1-11-3 to -4 (West 1987 & Supp. 1991); N.Y. BANKING

LAw § 96 (McKinney 1990); Halpert, supra note 112, at 487-88.

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deposit taking as a core element of banking and require a bank charter toengage in that activity. In order to receive that charter, the firm must be a"bank" and must restrict itself to exercising the powers specified in thestatute." 9 If retailers are to be authorized to offer deposit accounts, thesefederal and state provisions must be changed.

Beyond a change in the literal language of the chartering statutes, adoptionof the deregulatory approach to lifeline banking services also requiresrethinking the conceptual basis of regulation. This conceptual basis can bestbe illustrated by considering judicial interpretations of the statutes. InArnold Tours, Inc. v. Camp,20 South Shore National Bank bought a travelbureau, relying on a prior ruling by the Comptroller that "national banksmay provide travel services for their customers and receive compensationtherefor.' 2' Forty-two independent travel agents sued South Shore and theComptroller. The district court found for the travel agents, holding theComptroller's ruling invalid and ordering the bank to divest itself of itstravel agency.'2 The court of appeals affirmed. It rejected the Comptroller'sargument that operating a travel agency is closely related to banking becauseit involves "particular applications of the broad agency and informationalservices which banks traditionally offer."'' In the court's view, the oper-ation of a travel agency was "a highly complex activity,' 2 4 involvingrepresentation of the carrier as well as the customer and including functionsregulated by the Civil Aeronautics Board, the Interstate Commerce Com-mission, and the Federal Maritime Commission. The court said: "[Thereis a difference between supplying customers with financial and informationalservices helpful to their travel plans and developing a clientele which looksto the bank not as a source of general financial advice and support but asa travel management center."'

What is striking about this entire regulatory scheme, as reflected inopinions such as Arnold Tours, is its conceptual segregation of bankingactivities from other business endeavors. It is useful, for descriptive purposessuch as the Fortune 500 listing, to divide businesses into categories. In mostcases, however, these categories have no legal force; the government grantsthe firm a corporate charter, thus constituting it as a legal entity, but does

119. See, e.g., sources cited in note 118.120. 472 F.2d 427 (1st Cir. 1972). Originally, the Court of Appeals for the First Circuit

dismissed the case on the basis that the plaintiff lacked standing, 428 F.2d 359 (Ist Cir. 1970),but the Supreme Court reversed and remanded, 400 U.S. 45 (1970), in light of its decision inAssociation of Data Processing Service Orgs. v. Camp, 397 U.S. 150 (1970).

121. Arnold Tours, 472 F.2d at 429 (quoting 12 C.F.R. § 7.7475 (1972)).122. Arnold Tours, Inc. v. Camp, 338 F. Supp. 721 (D. Mass. 1972).123. Arnold Tours, 472 F.2d at 433. It also rejected the Comptroller's other argument,

which was that many banks had been providing travel agency services for a considerable periodof time. Id. at 434-35.

124. Id. at 433.125. Id. The court did not specify the nature of that difference, however.

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not specify its line of business. Studebaker can abandon automotive man-ufacturing for other fields and Coca-Cola can enter the entertainmentbusiness by acquiring Columbia Pictures without violating their respectiveconstitutive statutes. No one argues that Studebaker must limit itself to the"business of automotive manufacture" or that filmmaking is not a "properincident to food and beverage production."

Of course, Studebaker and Coca-Cola are subject to a variety of antitrust,environmental, securities, labor, and occupational safety regulations, butthese regulations were enacted for some fairly well-articulated social policypurposes. Limitations on the activities of banks, particularly the Glass-Steagall Act, are also often justified by reference to social policy, specificallythe policy of risk reduction. 126 But this justification is post hoc and unper-suasive with respect to the definitions in the chartering statutes. Thesestatutes date back to the preregulatory era and make no reference to risk. 127

They simply codify the essence of a bank, as if any blurring of thiscategorization would be an offense against nature. Contemporary interpre-tations perpetuate this Aristotelian approach.'2

The Arnold Tours decision does not contain any analysis of the riskinessof running a travel business. Had it done so, the outcome might have gonethe other way; operating a travel agency involves very little capital and isprobably much safer than making commercial loans. Instead, the decisionturns on the fact that a travel agency is not "banking" or an "incident"of banking. The closest it comes to an explanation is the idea that theessence of banking is financial matters, and the essence of a travel agencyis travel management. 29

In some sense, the lifeline banking proposal is a product of the sameconceptualism as the separation of banking and commerce. It takes theexisting structure of the banking industry as a given and attempts to aidlow-income consumers within the limitations of that structure. This leads,

126. See Comprehensive Reform in the Financial Services Industry: Hearings Before theComm. on Banking, Housing, and Urban Affairs, 99th Cong., 1st Sess. 170-71 (1985) (statementof Edwin B. Brooks, President, Security Federal Savings and Loan Association, Richmond,Va.); id. at 648-49 (statement of James G. Cairns, Jr., President, Peoples National Bank ofWashington, Seattle, Wash.; President, American Bankers Association); Halpert, supra note112, at 509-10. Another social policy that is often invoked is the danger posed by the powerof large institutions operating in many sectors of the economy. See id. at 500-07; L. BRANDEIS,OTHER PEOP.ES' MONEY (1967). This second concern is often voiced about commercial banks-probably a deep reverberation of American populism-but it is not often a concern aboutsupermarkets and other retail chains, which is the issue in this Article.

127. See supra note 118.128. For incisive analysis of the risk argument, see Halpert, supra note 112, at 509-32;

Macey & Miller, Bank Failures, Risk Monitoring, and the Market for Bank Control, 88COLuM. L. REv. 1153 (1988).

129. Arnold Tours, 472 F.2d at 433. Or as William Seidman, Chairman of the FDIC, putthe argument: "my view is that a bank is a bank is a bank." 1986 Senate Hearings, supranote 92, at 252.

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almost ineluctably, to price regulation; if the product cannot be changed,the only way to make it more accessible is to lower its price. The lifelineproposal also partakes of the conceptualism endemic to the banking fieldin a more general way. It treats "price" as a pre-existing entity, like"bank"; if the price is too high, banks must be ordered to lower it. Infact, price is not a thing in itself but the product of interacting marketforces. The effort to lower prices by direct ukase leaves those market forcesbubbling below the surface, where they will tend to undermine the entireeffort. To decrease prices effectively, one must act upon those marketforces, relying on social policy analysis rather than on pre-existing conceptualcategories.

B. Authorizing Retailers to Offer Depository Services

Given the conceptualism of the current banking statutes and of thiscountry's general approach to financial institutions, amending the charteringstatutes to eliminate existing prohibitions would probably be insufficient toproduce the desired result. Banking is a highly regulated industry, and theregulatory agencies often regard the separate identity of their regulatees asa matter of great importance. The result is a pervasively hostile atmospherefor nonbanking firms that wish to expand into the banking business andfor banking firms that wish to expand beyond it.

One indication of this phenomenon is the "nonbank bank" experience.Prior to 1987, the Bank Holding Company Act contained a major loophole;it defined a bank as an institution that both takes deposits and makescommercial loans. 130 Thus, a nonbanking firm could buy an institution thatwas recognized by ordinary consumers as a bank, in that it possessedchecking and savings accounts, tellers' windows, ATM machines, Ioniccolumns, snooty officers, and all the rest. The firm simply needed to avoidusing its funds for commercial loans, an activity quite remote from mostconsumers in any case. Institutions of this nature, dubbed "nonbank banks,"were established by several major firms, including Sears Roebuck and MerrillLynch.' The Federal Reserve Board, which administers the Bank HoldingCompany Act, tried to prohibit this device, but the Supreme Court invali-

130. Bank Holding Company Act, ch. 240, 70 Stat. 133, § 1 (1956) (codified as amendedat 12 U.S.C. § 1841(c) (1988)).

131. See Felsenfeld, Nonbank Banks-An Issue in Need of a Policy, 41 Bus. LAW. 99(1985); McIntyre, Note, The Nonbank Bank Loophole to the Bank Holding Company Act of1956-The Need for Congressional Action, 37 ALA. L. REV. 713 (1986); Note, The Demise ofthe Bank/Nonbank Distinction: An Argument for Deregulating the Activities of Bank HoldingCompanies, 98 HARv. L. REV. 650 (1985) [hereinafter Harvard Note].

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dated the Fed's action.'3 2 Despite this apparent opportunity, the "nonbankbank" was a limited and timidly used device; it served mainly as a meansof avoiding the geographic restrictions on banks but never really becamean instrument for the extensive merger of banking and commercial activi-ties. 1

33

California's experience provides an even clearer illustration of the samephenomenon. In California, where the chartering statute, perhaps inadver-tently, has dispensed with any restrictions on the activities of bankingfirms. 1 Despite this apparent latitude, California banks have not expandedinto unrelated fields, nor have nonbanking firms opened banks in California.The State Banking Department, after all, retains the power to ban anyactivity by a bank, no matter how closely related to banking, that threatensthe safety and soundness of the institution. 35 Banks fear, probably withreason, that the Department would presume that nonbanking activities areinherently unsafe;'3 6 nonbanking firms probably believe that the Departmentwould look askance upon their entry into the field. No firm is likely tosink capital into an enterprise if the continued existence of that enterprisewill be held hostage by a hostile regulator.

Whether the boundary between banking and commerce should be elimi-nated generally, in the interest of a more efficient financial services industry,is a large question that has been debated elsewhere. 37 This Article assertsthat this boundary should be eliminated so that retailers can provideinexpensive, convenient, and accommodating payment services to low-income consumers. It is not sufficient to remove existing restrictions againstdoing so; if retailers are to be induced to enter this new line of business,the underlying conceptual structure of the industry must be altered. Whatis needed is explicit statutory authorization. The National Bank Act or agiven state's chartering act must be amended to provide that retailers may

132. Board of Governors v. Dimension Fin. Corp., 474 U.S. 361 (1986). The Board hadpromulgated a regulation that expanded the definition of both deposits and commercial loansso that bank-like institutions that had slipped through the nonbank loophole would be subjectto the Act's restrictions. 49 Fed. Reg. 794 (1984). The Supreme Court took the position thatthe Act meant exactly what it said.

133. See Felsenfeld, supra note 131, at 112-14. The loophole was closed by the CompetitiveEquality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 552 (1987), which changed thedefinition of bank to include any institution that is federally insured or that accepts demanddeposits and makes commercial loans. See 12 U.S.C. § 1841(c) (1988). Nonbank banks createdbefore March 5, 1987 were allowed to continue in existence. Id. § 1843(f)(2). See Wetmore,Note, Banking and Commerce: Are They Different? Should They Be Separated?, 57 GEO.WASH. L. Rav. 994 (1989).

134. CAL. Fn;. CODE § 101 (West 1989) ("All provisions of law applicable to corporationsgenerally.., shall apply to banks."); id. § 206 (Banks may engage in "any business activity.").

135. Id. § 430(b)(5).136. Interim Report on A.B. 2521, Business Law Section, State Bar of California 82-85

(Sept. 25, 1989) (copy on file with Indiana Law Journal).137. See Halpert, supra note 112; Harvard Note, supra note 131.

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establish depository institutions, and any amendment must establish a reg-ulatory framework that specifically acknowledges the legitimacy of thoseinstitutions.

Beyond this basic authorization, there are a variety of policy alternativesto be confronted. The most crucial are whether retailers would be authorizedto offer all depository services or only transaction accounts and whetherthey would offer these accounts to all customers or only to those eligiblefor lifeline services. For the purpose of the discussion here, all that wouldbe necessary is the authority to offer transaction accounts to low-incomecustomers. The difficulty is that such a limited role might not be econom-ically attractive to the retailer.

Granting broader powers to retailers, however, increases the potential riskif these retailers prove less stable than banks and threatens to underminethe existing stability of banks by increasing the competition for depositfunds. While risk is the specter that haunts deregulation, much of theconcern about it is little more than a post hoc justification for the concep-tually based structure of the financial services industry. There is no reasonto believe that the risk presented by retailer deposit accounts could not bebrought within acceptable limits. As stated above, the risk could be reducedby imposing the same regulatory scheme on retailers and banks and byrequiring retailers to possess high minimum asset levels., 8

The effect of this proposal upon existing financial institutions is moreserious. Protecting a group of private businesses from market competitionis generally bad public policy. But financial institutions are hothouse plants;they have been nurtured to their present condition by regulation, andsubjecting them to a cold blast of competition would be unwise and unfair.

The best course, therefore, would be to limit retailers to consumerchecking and savings accounts. Further limiting these accounts to checkingaccounts only, or to low-income consumers, would probably be too restric-tive. Once an institution has established the capacity to offer transactionaccounts, there are economies of scale in offering these accounts, togetherwith savings accounts, a9 to as many people as possible. If retailers wererestricted to a subset of their customers, they would probably be unable tocompete with banks. On the other hand, they could probably be limited toconsumer accounts generally, since obtaining and managing commercialaccounts is a separate enterprise unrelated to the retailer's customer base.

After determining the scope of a retailer's deposit-taking powers, the nextstep would be to define the restrictions on its use of funds. This involvesboth the range of business opportunities available to the retailer and the

138. See supra text accompanying notes 97-102.139. Since deregulation, see supra note 11, the distinction between these two types of

accounts is relatively minor.

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amount of risk it is permitted to assume. The most obvious businessopportunity is consumer lending."'° The types of firms that can lend moneyto consumers is not restricted at present, so permitting retailers to do sowith deposited funds would not subject banks to any added competition.Retailers that offered deposit accounts would be a natural place for con-sumers to borrow, and the advantages to both the retailer and the consumerwould warrant granting retailers specific authority to use deposited fundsfor this purpose.

Restrictions on the use of deposited funds not only determine the businessopportunities of the firm, but also control the level of risk it incurs. Asdiscussed above, one way to subsidize transaction accounts for low-incomeconsumers is to permit the depository institution-whether bank or retailer-to use insured funds without restriction. 141 The virtue of this approach isadministrative simplicity.1 42 Eligible accounts could be defined in terms ofa maximum average daily balance-$500 for example-plus a maximumbalance at any given time, perhaps $2000. The depository institution wouldbe permitted to use the average amount of funds in eligible accounts withoutrestriction. This amount could be readily calculated on a monthly basis bya computer program and checked by the regulatory agency by means of thesame program. There would be no need to make individualized eligibilitydeterminations, nor would the institution need to impose additional chargesif the daily balance went above the established maximum. Rather, theinstitution would know that particular sites, or particular fee levels, gener-ated a certain amount of eligible, and thus unrestricted, deposits and wouldadjust its policies accordingly.

Implementation of this program would require two further changes in thebanking laws. First, chartering statutes would need to define eligible accountsand specifically authorize the institution to use these funds without restric-tion. Second, the federal deposit insurance statutes would need to beamended to ensure that this unrestricted use was explicitly authorized anddid not constitute an unsafe or unsound banking practice. As in the caseof the chartering statutes, no firm would invest its resources to establish adepository institution catering to low-income customers if there were anyrisk of a negative decision by the regulators.

The general conclusion, therefore, is that a program authorizing retailersto provide transaction accounts and to subsidize the accounts of low-incomeconsumers, by removing restrictions on the institution's use of insureddeposits, requires a statute that explicitly authorizes all these features,

140. This is not really a risk-related question; consumer lending is generally a low-riskbusiness, and all insured institutions are currently permitted to engage in it.

141. See supra text accompanying notes 105-06.142. Other virtues of this approach, in terms of incentives to serve low-income customers,

have already been discussed. Supra notes 104-05 and accompanying text.

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establishes unambiguous regulatory supervision, and clearly takes precedenceover any other statute. Whether even these rather extensive changes in thelaw would be sufficient to induce nonbanking firms to enter the depositbusiness must remain an open question. Given the conceptualism thatcurrently prevails in the field, however, it seems apparent that any ambiguityor lack of explicit authority would preclude this solution to the problem ofproviding low-cost payment services to low-income consumers.

CONCLUSION

The call for lifeline banking has been a persistent one over the last decade.Underlying it is the brute fact that a large proportion of low-income familiesare outside the American financial system. They possess neither checkingnor savings accounts and rely instead on cash, storefront check-cashingoutlets, and a variety of other mechanisms that seem to provide inferiorservice.

Despite a respectable amount of empirical research on the matter, we stilldo not know why so many families do not have bank accounts. Specifically,we do not know whether they find banks too expensive, too inconvenient,or too intimidating. Current lifeline banking proposals, which would requirebanks to offer checking accounts at below-market rates, are premised onthe assumption that low-income people find banks too expensive. Even ifthat assumption is correct-even if low-income people do not shun banksbecause they are inconvenient or intimidating-the proposal is unlikely tobe effective. Forced to offer accounts at rates below those they want tocharge, banks will tend to close branches in inner-city neighborhoods or todecrease the quality of service they provide. These are natural consequencesof price regulation, and they are difficult to counteract without massiveintervention.

This Article proposes an alternative approach for meeting the financialneeds of low-income consumers. It recommends expanding the servicesavailable at the facilities they currently make use of, on the theory that itis easier to follow their existing patterns of commercial activity rather thantry to establish new ones. Most people shop at grocery stores on a regularbasis, and many people cash checks there. These stores and other retailchains could be authorized to offer insured deposit accounts. If one wantsto subsidize these accounts so that they are less expensive as well as moreconvenient, one can do so by offering the retail chains positive inducementsto lower their prices, rather than by ordering them to do so. The mostpowerful inducement would be to permit these chains-and banks as well-to use the funds received from eligible depositors without restriction. Thiswould make deposits by low-income consumers the most attractive sourceof funds, without significantly increasing the risk to the federal insurancesystem.

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The solution proposed emerges from the economic analysis of law. Itspeaks the language of markets and incentives, rather than coercion, andtreats the profit-maximizing behavior of financial institutions as a prevailingcondition, rather than a moral failure. This is not based on any judgmentthat the market is either morally superior or intrinsic to human nature. Itsimply acknowledges that market behavior is a powerful force at this timeand in this society. Our society has learned, from sad experience with manyother programs, that the luxury of using social policy to express appealingmoral sentiments is purchased at the price of effective results and ultimatelyburdens those whom it is designed to benefit.